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'Nightmare' scenario: Tech giants brace for virus chaos as factories restart

As Chinese-based manufacturers begin to restart factories, no one knows for sure when they'll be back at full-speed – or what sort of chaos may ensue.

Tech producers led by Foxconn, which makes the majority of the world's iPhones from Zhengzhou a few hundred miles from the coronavirus outbreak's epicentre, had begun preparing investors for the potential bedlam when hundreds of thousands make their way back to factories.

Foxconn makes the majority of the world’s iPhones from Zhengzhou, a few hundred miles from the coronavirus outbreak’s epicentreCredit:Thomas Lee

Apple's most important partner warned investors of the daunting task of securing enough workers despite widespread transport blockades, quarantining thousands, and the "nightmare" scenario of an on-campus epidemic that could shut down production altogether. Last week, it took the unprecedented step of warning workers to stay away from its Shenzhen headquarters till further notice as government inspectors vet its containment procedures, Bloomberg News reported. And it's delayed the return of workers to its main iPhone-making plant in central China, people familiar with the matter said.

"How we can make sure there will be no infection within our campuses will be the first priority, because if you put a lot of people together and one of them gets infected, that will be a nightmare," Foxconn investor relations chief Alex Yang told investors last week, according to a recording obtained by Bloomberg News. "We try very hard to make sure the possibility of any on-site infection will be as low as zero, although it will be challenging."

The deadly virus has illustrated the increasingly central role China plays in global manufacturing, from clothing and chemicals to automobiles and especially technology. Just about every major piece of consumer electronics is made in China, from iPhones and gaming consoles to half the world's liquid crystal display or LCD screens. The contagion has already shuttered plants across China for a week longer than anticipated after the Lunar New Year break – a disruption that could get much worse if rolling quarantines and suspended rail and air links prevent the return of the millions of blue-collar laborers at the heart of electronics assembly.



When they do make it back, untold numbers will get funneled into a quarantine of up to two weeks — a sequester of unknown scale. Any disruptions at Chinese plants can, in a worst-case scenario, freeze parts of the supply chain by triggering cascading shortages.

On last week's call, Yang spoke in depth about Foxconn's virus-prevention measures and the need to comply with various regulations in the so-called "iPhone city" of Zhengzhou — just 300 miles from Wuhan, the origin of the outbreak – covering infection-fighting measures from quarantines to face mask and hand sanitiser inventories. "If you are talking about tens of thousands of people in a line, in a building, in a campus and we try to prevent a virus – and in the meantime you are asking for them to do their normal job – that's very challenging."

Apple and Foxconn, known also as Hon Hai Precision Industry, were among the first corporations to try and quantify the viral epidemic's impact. Hon Hai slashed its 2020 outlook last week, anticipating disruptions to Apple's carefully calibrated production chain centreed on China, as well as dampening consumer demand and overall economic growth. As China's largest private employer and a key partner to many of the world's most recognisable consumer brands, the Taiwanese company has become a high-profile symbol of how the outbreak could disrupt Chinese manufacturing and hence the world's supply of electronics.

The disruptions extend well beyond electronics or technology. Many auto plants in the world's largest market remain idled. Toyota, which initially halted its Chinese plants until February 9, said Friday it now plans to resume production as soon as February 17. Honda said it will reopen its factory in Hubei on February 14 with an eye toward restarting output the week of February 17. And Volkswagen also delayed the resumption of production at some of its Chinese businesses until February 17.

Several of the biggest names in tech including Sony and Samsung have said they'll restart production in China as scheduled. Production at Tesla's new Shanghai factory – its first outside the US – resumed on February 10, it said.

But much depends on the extent and severity of the outbreak. Even if it peaks soon, the interconnectedness of just-in-time global supply means the entire system will go through an unprecedented upheaval. The shortage of just one component exerts a ripple effect on the entire chain by holding up production further down the line, rippling through the carefully choreographed networks that companies from Apple to Huawei and display-maker BOE Technology Group rely on.

"There will certainly be risks of on-site infections. Companies also do not have control over neighbourhoods near their factories," said Eric Tseng, chief executive officer of Taipei-based Isaiah Research. "Manpower levels for most manufacturers will still be low during the first two to three weeks of February due to the length of quarantines and the possibility that not many workers will return."

More broadly, economists are still struggling to tote up the economic fallout of the outbreak. While SARS was bad economic news for China and its neighbors, which suffered from weaker exports and falling tourism, China's small weight capped the global impact back then, when China's GDP was 4 per cent of the global total. That share now stands at 17 per cent. That means, even if the outbreak peaks soon and producers impose double overtime to make up for lost production, the final end-demand in 2020 for gadgets of all stripes could take a severe beating.

Bloomberg

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